Much-Needed Municipal Income Tax Reform Approved by Ohio Senate; House Set to Vote Next

The Ohio Senate passed House Bill (“H.B.”) 5, which would streamline Ohio’s municipal income tax system. H.B. 5 is greatly needed due to the over 600 different municipalities with varying tax rules, tax rates, and over 300 different tax forms. The House is now set to vote on the final version of the bill.

Specifically, H.B. 5 would provide for the following:

  • A uniform municipal income tax base defining the types of income that municipalities can and cannot tax. Deferred compensation and stock-option income would be subject to tax, while alimony and child support, compensation for personal injuries or property damage, and interest on federal obligations would be excluded.
  • Mandated 5-year carry forward for net-operating losses.
  • Consistent taxation of pass-through entities at the entity level.
  • Increase the occasional entry rule from 12 to 20 days, which provides a safe-harbor for employers from withholding tax from employees working temporarily outside their normal work location.
  • Uniform administrative procedures for filing returns, appeals, and imposing penalties and interest.
  • Establishment of a municipal taxpayer bill of rights, modeled after the Ohio Taxpayer Bill of Rights.

However, H.B. 5 would not require centralized collection of municipal income taxes.

Opponents of H.B. 5 argue that it will ultimately cost local governments about $82 million per year and lead to less local control and potential reductions in tax collections. Specifically, opponents point to the provision that calls for municipalities to allow a 5-year net operating loss carry forward period, which would be delayed pending the recommendation by a study committee to be created to review such a rule. Yet, these opponents ignore the inefficiencies of a municipal income tax system with hundreds of different taxing jurisdictions which causes both municipalities and Ohio taxpayers to incur significant costs to comply therewith.

If H.B. 5 passes the House, municipalities must comply with the law by January 1, 2016.

If you have any questions regarding how H.B. 5 may affect you or your business, please contact Steve Dimengo, Rich Fry, or Casey Davis.

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